More Good News—A Commentary by Ian Ayres ’86

The following commentary was published in The New York Times on May 21, 2009.

More Good News
By Ian Ayres ’86

Just before Christmas, I reported that the CBOE’s Volatility Index (^VIX) had fallen from “an apocalyptic 80 percent” to a merely extraordinary 45 percent. And I said:

When it drops below 30 percent, it will be a strong indication that the market correction is complete and we’re back to business as usual.

Happily, we’re going to get a chance to see if I was right. This week, the VIX fell below 30 — closing at 28.80:

Thirty percent volatility is still 10 percentage points higher than normal. So the roller-coaster ride may not completely be over. And returning to normal volatility does not mean that the stock level will return quickly to its pre-crisis level. But it is a sign that the worst gyrations may be behind us. In fact, we may not want a rapid upturn in prices.

A friend (who is net long in the market) quipped yesterday that the only thing better than the stock market going up 3 percent on Tuesday would be if it had only gone up 1.5 percent.

But we should take it as good news that after a substantial stock price run up on Monday, the VIX responded on Tuesday by falling — a sign that the increase was moving us toward lower future volatility.